Investing 101: How the stock market works and what it does

By now you should understand that the NYSE, or the stock market, isn’t just a term or a concept people use to sound smarter or talk about money. It is an actual firm with employees, facilities, offices, and such, like any other company. So what is it that the stock market actually does? In the simplest of forms, the primary function of the stock market is to serve as a middleman between companies and shareholders (sellers) trying to sell their equity (stocks) and potential shareholders (buyers). Let’s break that down so you can really get an idea of what it is the middleman does. 

For a company to be traded in the stock market they have to go through an IPO which is an Initial Public Offering, obviously, by now, we’re assuming this company meets all the requirements to be traded on a said market. An IPO is a method used to discover the initial price that the stock of the company is going to be traded for. In a previous article I briefly mentioned the basic steps you have to follow to determine what your asking price for a stock should be. During an IPO what happens is the company and its original shareholders (the sellers), usually along with some sort of outside consulting, decide the price at which they originally want to sell their stock for, in other words, they decide how much they think their company is worth to them, which is called the offering price. Then the buyers, which is the public, tell them what they think the company is worth and what price they’re willing to buy the stock for. The two go back and forth until they find a common ground and the company begins to be publicly traded at that common buying and selling price. 

As the middleman it is now the job of the market to determine the buying prices (prices people are willing to pay for a share of the company) and the selling prices (prices at which the company and shareholders are willing to sell a share of the company) and determine what the middle ground is to tell investors, shareholders, and the company what their stock is worth at all times. This price is always fluctuating when the market is open because people are always buying and selling or changing what the price they’re willing to buy and sell for which changes the value of the stock. So the stock market determines (based on information provided by the investors, shareholders, etc.) the price at which people are buying and selling the different stocks of different companies, but how can you actually buy and sell a stock? 

To buy and sell a stock you need to go through a broker. The broker is an authorized agent (not an agent of the stock market) to buy and sell securities through a financial firm for the public. There are different kinds of brokers, such as online brokers which are websites that have the agency of a broker to buy and sell stocks. Then you have your average brokers which generally work for a financial institution in their offices. Lastly, you have the brokers who are on the trading floor, meaning these brokers work inside the NYSE meaning that they have the quickest and easiest access to the market because they’re right there watching and making decisions in real time. These brokers are agents of financial industries who have seats on the stock exchange and are briefed by their respective financial industries. 

Long story short, you have buyers (people who want to invest in the stock market,) you have sellers (people who own securities and want to sell them,) and you have brokers (the middleman employee by financial institutions that give you access to the stock market.) The market gathers information from all of these parties, uses it to calculate buying and selling prices of securities in real time, and allows brokers to process the buying and selling of securities between the other parties. As an investor, you will often be using a broker to process your transactions. To continue to learn how to get started with investing follow the rest of the Investing 101 series.  Don’t forget to subscribe to our blog to always stay updated on our latest posts and activities. 

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